nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒07‒24
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Product Line Pricing in a Vertically Differentiated Oligopoly By George Deltas; Thanasis Stengos; Eleftherios Zacharias
  2. Upstream Competition between Vertically Integrated Firms By Marc Bourreau; Johan Hombert; Jérôme Pouyet; Nicolas Schutz
  3. Customization in an Endogenous-Timing Game with Vertical  Differentiation By Oksana Loginova; X. Hnery Wang
  4. The Optimal Timing of the Introduction of New Products By Marzia Raybaudi; Martin Sola; Shasikanta Naindebam
  5. Empiricism Meets Theory: Is the Boone-Indicator Applicable? By Alexander Schiersch; Jens Schmidt-Ehmcke
  6. Consumers Cooperatives in Mixed Oligopolies. By Marco Marini; Alberto Zevi
  7. Auctions, Entry Deterrence and Divisibility of the Object for Sale By Julio Peña Torres; Gabriel Fernándes Aguirre,
  8. Shadow Economy and Entrepreneurial Entry By Estrin, Saul; Mickiewicz, Tomasz
  9. A Methodology to Support Product Differentiation Decisions By Ramdas, Kamalini; Zhylyevskyy, Oleksandr (Alex); Moore, William L.
  10. An Institutional Analysis of the Enforcement Problems in Merger Control By Oliver Budzinski
  11. Does Cross-Listing in the US Foster Mergers and Acquisitions and Increase Target Shareholder Wealth? By Jean-Claude Cosset; Siham Meknassi
  12. Price Discrimination in Practice: The Market for Drugs in Egypt and the U.S. By Rania Zaher Naguib
  13. Death by Market Power: Reform, Competition and Patient Outcomes in the National Health Service By Martin Gaynor; Rodrigo Moreno-Serra; Carol Propper
  14. Port activities, hinterland congestion, and optimal government policies: the role of vertical integration in logistic operations By De Borger B.; De Bruyne D.
  15. Competitive Permit Markets and Vertical Structures: The Relevance of Imperfect Competitive Eco-Industries By Sonia Schwartz; Hubert Stahn

  1. By: George Deltas (Department of Economics, University of Illinois, U.-C.); Thanasis Stengos (Department of Economics,University of Guelph); Eleftherios Zacharias (Department of Economics, Athens University of Business and Economics)
    Abstract: This paper empirically examines the joint pricing decision of products in a firm's product line. When products are distinguished by a vertical characteristic, those products with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is a price premium for products on the industry and/or the firm frontier, i.e., for the products with the highest value of the characteristic in the market or in a firm's product line. The existence of price premia for lower ranked products is also investigated. Finally, the paper investigates whether firms set prices to avoid cannibalizing the other products in their portfolio, whether competition with rival firms is stronger for products that are closer to the frontier compared to other products, and whether a product's price declines with the time it is offered by a firm. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). Finally, there is evidence that a product's price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm's offerings constant), possibly as an attempt way to reduce cannibalization.
    Keywords: Pricing, Multiproduct rms, Personal Computers, Product Entry and Exit
    JEL: L11 D43 L63
    Date: 2010
  2. By: Marc Bourreau (Institut Télécom - Télécom ParisTech - Télécom ParisTech, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Johan Hombert (HEC Paris - GROUPE HEC); Jérôme Pouyet (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Nicolas Schutz (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand result may not obtain, and the input may be priced above marginal cost in equilibrium, which is detrimental to consumers' surplus and social welfare. We obtain that these partial foreclosure equilibria are more likely to exist when downstream competition is fierce. We then use our model to assess the impact of several regulatory tools in the telecommunications industry.
    Keywords: Vertical foreclosure, vertically-related markets, telecommunications.
    Date: 2009–12–09
  3. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia); X. Hnery Wang (Department of Economics, University of Missouri-Columbia)
    Abstract: We study customization in a duopoly game in which the firms' products have different qualities. Whether customization choices are made simultaneously or sequentially is endogenously determined. Specifically, the customization stage of the game involves two periods. Each firm either selects its product type in period 1 or postpones this decision to period 2. We show that both quality and endogenous timing play important roles in determining the equilibrium outcome. Customization occurs only if the quality difference is sufficiently large. Endogeneity of timing in the customization stage sometimes enables the firms to achieve an outcome that is Pareto superior to that if they were to make their customization choices simultaneously. Although the higher quality firm is more likely to customize, in some circumstances endogenous timing allows the lower quality firm to obtain an advantage that it would not have under simultaneous customization choices.
    Keywords: customization, horizontal differentiation, vertical differentiation, endogenous timing
    JEL: D43 L13 C72
    Date: 2010–07–02
  4. By: Marzia Raybaudi; Martin Sola; Shasikanta Naindebam
    Abstract: This paper addresses the e¤ects for partial equilibrium models of relaxing one of the critical underlying assumptions of the textbook approach (Dixit and Pyndick, 1994) to investment under uncertainty: either the potential investor has access to a single project or she can consider competing (or complementary) projects independently. This paper studies the investment decision of a multi-product monopolist where the projects exhibit interdepen- dence between the cash ‡ows of di¤erent products. We derive the optimal entry time for each product and show that both the choice and timing of investment is di¤erent from that suggested by the textbook approach. The decision to produce related goods simultaneously or sequentially crucially depends on their degree of substitutability or complementarity.
    JEL: D21 D24 D42 D81
    Date: 2010–07
  5. By: Alexander Schiersch; Jens Schmidt-Ehmcke
    Abstract: Boone (2008a) proposes a new competition measure based on Relative Profit Differences (RPD) with superior theoretical properties. However, the empirical applicability and robust-ness of the Boone-Indicator is still unknown. This paper aims to address that question. Using a rich, newly built, data set for German manufacturing enterprises, we test the empirical valid-ity of the Boone-Indicator using cartel cases. Our analysis reveals that the traditional regres-sion approach of the indicator fails to correctly indicate competition. A proposed augmented indicator based on RPDs performs better. The traditional Lerner-Index is still the only meas-ure that correctly indicates the expected competitive changes.
    Keywords: Competition, Boone-Indicator, Cartels, Census Data
    JEL: L12 L41 D43
    Date: 2010
  6. By: Marco Marini (Department of Economics, University of Urbino "Carlo Bo".); Alberto Zevi (University of Rome "La Sapieza".)
    Abstract: Consumer co-operatives constitute a highly successful example of democratic forms of enterprises operating in developed countries. They are usually organized as medium or large-scale firms competing with profit-seeking firms in retail industries. In this paper we model such a situation as a mixed oligopoly in which consumer co-operatives maximize consumer-members' utilities and distribute them a patronage rebate on their goods purchase. We show that when consumers possess quasilinear preferences over a bundle of symmetrically di¤erentiated goods and firms operate with a linear technology, the presence of consumer co-operatives positively affects all industries output and social welfare. The effect of Co-ops on welfare is shown to be more significant when goods are either complements or highly di¤erentiated and when competition is à la Cournot rather than à la Bertrand.
    Keywords: Consumer Co-operatives, Profit-maximizing Firms, Mixed Oligopoly.
    JEL: L21 L22 L31
    Date: 2010
  7. By: Julio Peña Torres (ILADES-Georgetown University, Universidad Alberto Hurtado); Gabriel Fernándes Aguirre, (Economista miembro de la División Económica, Fiscalía Nacional Económica de Chile)
    Abstract: This paper analyzes entry deterrence strategies at sequential multi-unit English-type repeated auctions, based on entry deterrence observed at a series of yearly auctions of fishing rights occurring since the early 1990s in the Chilean sea bass fishery. It analyzes parametric configurations under which incumbent firms could have followed non-cooperative deterrence strategies or else may have colluded for that purpose. A two-stage competition model is developed. In the first stage there occurs sequential auctioning of multiple fishing rights; in the second stage, production rights are used to compete in a homogeneous-good Cournot market. The analysis focuses on the relationship between the number of incumbents, sources of competitive advantage for them, and the number and size of the rights for sale. The core of the analysis lies in answering how the divisibility of the object(s) for sale affects the possibilities of incumbents to deter new rivals’ entry.
    JEL: D2 D4 Q2
    Date: 2010–04
  8. By: Estrin, Saul (London School of Economics); Mickiewicz, Tomasz (University College London)
    Abstract: We analyze theoretically and empirically the impact of the shadow economy on entrepreneurial entry, utilising 1998-2005 individual-level Global Entrepreneurship Monitor data merged with macro level variables. A simple correlation coefficient suggests a positive linear link between the size of the shadow economy and entrepreneurial entry. However, this masks more complex relationships. With appropriate controls and instrumenting for potential endogeneity where required, the impact of the shadow economy on entry is found to be negative, based on a linear specification. Moreover, there is also evidence of nonlinearity: entrepreneurial entry is least likely when the shadow economy is of medium size. We attribute the negative effects of shadow economy on entry to perceived strong competition faced by new entrants when the shadow economy is widespread. At the individual level, an extensive shadow economy has a more negative impact on respondents who are risk averse. In addition, in the economies where property rights are strong, the negative impact of the shadow economy is weaker.
    Keywords: shadow economy, entrepreneurship
    JEL: O17 D2 L26 P14
    Date: 2010–07
  9. By: Ramdas, Kamalini; Zhylyevskyy, Oleksandr (Alex); Moore, William L.
    Abstract:  Choosing the right set of new products to offer is a key driver of profitability. New products often share some design attributes with existing products, thus, firms need to decide which attributes to keep common and which to differentiate. We propose and empirically implement a new methodology that can help managers to navigate the complex decision of where to focus differentiation, using “looks-like†prototypes that typically become available in the later stages of the product-development process. Our methodology complements early stage product-positioning methods, such as conjoint analysis and perceptual mapping. It also offers a way to estimate the impact of context dependence on choice. Finally, our methodology provides a way to test empirically whether perceptual mapping based on pairwise similarity judgments is appropriate for a product category. Using data obtained froma major wristwatchmanufacturer, we are able to suggest guidelines on how to differentiate the firm’s offerings and estimate the magnitude of context dependent effects. We also find that for wristwatches, attributes that drive perceptions differ from those that drive choice. Overall, our approach can help avoid falling into the trap of focusing variety on attributes that are costly to differentiate and have little impact on choice.
    Keywords: Conjoint analysis; consumer choice; context dependence; “looks-like†prototype; perceptual mapping; product differentiation; product similarity
    Date: 2010–05–10
  10. By: Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark)
    Abstract: The literature identifies a significant drop in merger control enforcement activity on both sides of the Atlantic during the last decade. Furthermore, this drop in enforcement activity is convincingly connected to enforcement problems on the sides of the competition agencies. This paper goes beyond the identification of under-enforcement and proceeds to the analysis of causes for the enforcement problems and the discussion of possible solutions. It argues that modern institutional economics suggest that a lack of ‘fit’ between the ‘new’ economic approach to merger control and the ‘old’ institutional environment of the legal enforcement procedures explains the drop of enforcement effectiveness on both sides of the Atlantic by implicitly raising the standard of proof, leading to unattainable standards, virtually eroding merger control enforcement power. As a consequence, the effects-based approach to merger control fails due to its failure to acknowledge its institutional implications. Reconciling industrial and institutional economics – promoting a comprehensive competition economics approach – however offers avenues towards an effective use of sophisticated industrial economic theories and methods. Firstly, incorporating economics into enforceable rules like strong rebuttable presumptions would adjust substantive merger control policy to the procedural institutional environment. Secondly, a reform of the standards of proof provisions would adjust the procedural framework to the characteristics of modern economic evidence and concepts. In summary, the enforcement problems in merger control require even more economic thinking, complementing industrial economic thought with institutional economic thought. I like to thank Arndt Christiansen and Eva Roth as well as the participants of research seminars at the Kiel Institute for the World Economy and at the Düsseldorf Institute for Competition Economics (DICE) for valuable comments on earlier versions of this paper.
    Keywords: Merger control, European competition policy, antitrust, enforcement problems, in-stitutional economics, more economic approach, standard of proof
    JEL: K21 L40 D02
    Date: 2010–06
  11. By: Jean-Claude Cosset; Siham Meknassi
    Abstract: We examine the role of cross-listing in alleviating domestic market constraint and facilitating cross-border mergers and acquisitions. Cross-listing appears to strengthen the bargaining power of target firms, allowing them to extract higher takeover premiums relative to their non-cross-listed peers. Moreover, shareholders of Sarbanes-Oxley-compliant targets seem to benefit from a higher premium. We also find that cross-listed firms are more likely to be acquisition targets. This evidence is consistent with the idea that cross-listing increases firms’ attractiveness and visibility on the market for corporate control. Our results are robust to various specifications and to the self-selection bias arising from the decision to cross-list.
    Keywords: Cross-listing, mergers & acquisitions, governance, Sarbanes-Oxley Act
    JEL: G15 G34 K00
    Date: 2010
  12. By: Rania Zaher Naguib (Faculty of Management Technology, The German University in Cairo)
    Abstract: This paper attempts to analyze the medical and economical reasons that cause a difference in the price elasticity of patients' demand to drugs between Egypt and the United States of America. The study was based on two medicines produced by Pfizer (Lipitor and Viagra), with both of them available in Egypt as well as the United States. The result of this study reflected that Egyptians are more sensitive to the changes in price relative to Americans for both Lipitor and Viagra because of different economical and medical factors.
    Keywords: Price Discrimination, Pharmaceutical Industry
    JEL: I11 D42
    Date: 2010–07
  13. By: Martin Gaynor; Rodrigo Moreno-Serra; Carol Propper
    Abstract: The effect of competition on the quality of health care remains a contested issue. Most empirical estimates rely on inference from non experimental data. In contrast, this paper exploits a pro-competitive policy reform to provide estimates of the impact of competition on hospital outcomes. The English government introduced a policy in 2006 to promote competition between hospitals. Patients were given choice of location for hospital care and provided information on the quality and timeliness of care. Prices, previously negotiated between buyer and seller, were set centrally under a DRG type system. Using this policy to implement a difference-in-differences research design we estimate the impact of the introduction of competition on not only clinical outcomes but also productivity and expenditure. Our data set is large, containing information on approximately 68,000 discharges per year per hospital from 162 hospitals. We find that the effect of competition is to save lives without raising costs. Patients discharged from hospitals located in markets where competition was more feasible were less likely to die, had shorter length of stay and were treated at the same cost.
    JEL: I11 I18 L13 L32
    Date: 2010–07
  14. By: De Borger B.; De Bruyne D.
    Abstract: We study the implications of vertical integration in logistics and transport operations for welfare-optimal port access charges and hinterland congestion tolls. We show that, first, vertical integration of terminal operators and transport firms does not affect the optimal congestion toll rule for the hinterland, but it does imply higher optimal port access charges. Second, the government not only has an incentive to promote competition between downstream firms, it may also be beneficial to approve of vertical mergers in the logistic chain. Third, the government’s failure to respond to changes in industry market structure may have large welfare effects. Fourth, both under separation and integration, optimal port fees may imply subsidies if downstream firms enjoy a high degree of market power.
    Date: 2010–06
  15. By: Sonia Schwartz (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Hubert Stahn (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: Permit markets lead polluting firms to purchase abatement goods from an eco-industry, which is often concentrated. This paper studies the consequences of imperfect competition in an eco-industry on the equilibrium choices of the competitive polluting firms. It then characterizes the second best pollution cap. By comparing this situation to a competitive one, we show that Cournot competition on the abatement good market contributes not only to a non optimal level of emission reduction but also to a higher permit price, which reduces the production level. These distortions increase with market power measured by the margin taken by the non competitive firms and suggest a second best less stringent pollution cap
    Keywords: pollution permit market, eco-industry, imperfect competition
    Date: 2010–07–12

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